On April 28, 2010 I wrote an article entitled “The first signs of financial trouble.” This was three days after the second round of the Hungarian national elections that resulted in a stunning victory for Viktor Orbán’s Fidesz. As I noted, the initial international reaction to the two-thirds majority was positive. The Hungarian forint strengthened, reflecting the hope of investors that the new government’s overwhelming majority would translate into resolute efforts to set the country’s financial house in order.
However, I continued, Viktor Orbán’s first few utterances made the markets jittery again. In the euphoria that followed the victory, Orbán made some very stupid remarks. He attacked the chairman of the Hungarian National Bank and indicated that András Simor had to go and, if that weren’t enough, he defiantly announced that neither the European Union nor the International Monetary Fund is his boss.
At that time some people may still have thought that these were just initial missteps and that Orbán and his team would realize that the world is watching. Some people thought that surely Viktor Orbán wouldn’t make the same mistakes he committed between 1998 and 2002. He is older and wiser and presumably more experienced. As it turned out, they were wrong. Orbán basically hasn’t changed. He is the same headstrong, vain, power-hungry, vengeful man who is great at political intrigue but hopeless as a responsible leader of the country. He is especially dangerous when he has such strong parliamentary and, for the time being at least, public backing.
And there is another problem with Orbán and crew. Their hopeless provincialism. In my earlier article I wrote that Fidesz leaders like to talk about their knowledge of the world. We were told that they will be the ones who will lead Hungary to the High Street of Europe as opposed to the provincial Prime Minister Gordon Bajnai and Péter Oszkó, his finance minister. In April, after the first signs of problems created by Orbán’s careless remarks, I commented that the road to the High Street of Europe seems to be bumpy. By now I’m convinced that Orbán’s team is actually wandering around on some dirt road of a God-forsaken village somewhere in northeastern Hungary. Their clumsy games with which they hope to mislead the financial world become international news overnight.
Let’s first talk about English-language media coverage. Lately there is a growing tendency among leading financial papers and even press agencies to hire local reporters who know the language and are familiar with the local political scene. The times when an English or American reporter was sent to Budapest maybe twice a year, spent a few days there, talked to some people who knew English, and then wrote something that was neither profound nor terribly accurate are over. Something happens in Hungary on Monday and on the very same day all the important online papers give accurate reports. A day later the article appears in their print editions. And pressure mounts. As a result, at least on one occasion, Orbán’s busy sidekicks had to back down. I’m talking about the “media reform” bill that was almost a carbon copy of the media law of Putin’s Russia. Whether the withdrawal of the proposal is only temporary we don’t know, but foreign pressure certainly played a role in the postponement.
Although Orbán’s economic minister György Matolcsy, who once already led Hungary down the economic garden path between 2000 and 2002, after a lot of pressure from abroad announced that after all the Orbán government will continue its predecessor’s strict fiscal policies and will stick to the projected 3.8% deficit, this announcement didn’t calm foreign investors’ nerves. Simply because other announcements are constantly being made about hitherto unanticipated government spending. The government’s efforts to paper over their plans to overstep the boundaries of their promised 3.8% deficit fail time and again. The careful observers stationed in Budapest who know what’s up report faithfully.
Here is the latest effort at hiding the truth from the world. The government, using Antal Rogán, an ordinary member of parliament and mayor of a Budapest district, proposed a bill that would be “tantamount to window dressing the budget to meet creditor-approved deficit targets.” Yes, it came to light because the cunning plan was reported by Reuter’s Hungarian journalist from Budapest and because another Hungarian, a strategist at 4Cast Ltd in London, discovered it in no time. Gábor Ambrus in London was emphatic: “That’s the realm of pure window-dressing, not just a PR maneuver.” He added that “the risks of budget slippage remain high in Hungary.”
So, what is the proposed bill supposed to do that is advantageous to the Hungarian government’s agenda of surreptitiously adding to the Hungarian deficit? The planned measures include keeping the losses of state-owned companies off budget accounts and loosening requirements for passing supplementary budgets. In 2008, at IMF’s urging, a Budgetary Council, a kind of watchdog over the budget, was established. The Council is headed by György Kopits, a Hungarian-American citizen who received his Ph.D. from Georgetown University. Politically he is close to Fidesz, but he is first and foremost a responsible man who is outraged. He immediately gave a press conference which was then dutifully reported by Reuters. According to Kopits, an easing of the rules would dilute transparency and “the proposed changes would essentially recreate the status quo before 2008, when the rules governing budget planning were tightened.” Kopits found the bill “a lamentable step backward.” Reuter’s assessment ends with the general impression that “analysts have warned there were implementation risks” in the government’s promise to stick to the 3.8% deficit.
While the government is engaging in financial shenanigans with the national budget, it is also making irresponsible promises. The latest is that it is thinking about setting up a new fund to help borrowers whose loans are in Swiss francs or in euros. Because of Hungary’s continued financial fumbling, the Hungarian forint is weakening rapidly. The forint has weakened against both the euro and the Swiss franc. Especially since the new government took over. Here are a couple of charts that show the seriousness of the problem.
Most of the loans are in Swiss francs. But the situation is not much better for those who took out loans in euros.
The Financial Times in an op ed piece gave some advice to the Hungarian government about the plan to set up a fund that would help troubled borrowers who find their monthly payments increasing. Chris Bryant, the author, wrote: “Under the plan, the government would set up a National Asset Management fund, which would purchase real estate put up as collateral from commercial banks, allowing mortage holders to rent the property.” Bryant describes it as the plan of a government that is “crowd-pleasing.” He adds that instead of setting up such a fund (for which in the first place there is no money at the moment) “the best thing [the government] can do to help foreign currency borrowers is to restore investors’ trust in Hungary.”
As far as I can see, the Orbán government in two short months managed to destroy the trust of the financial world in Hungary that the Bajnai-Oszkó duo managed to restore. Failure after failure, but they are not giving up on their games that are supposed to ensure their domestic popularity. But how long can these games be played before serious problems will beset the country? Not for long. Business Week reported on June 24 that “Hungary raised less than its target in a second straight auction of 12-month Treasury bills and the nation’s cost of borrowing increased as concern mounted that Europe’s debt crisis may escalate.” And yet Orbán and Co., seemingly unperturbed, continue with one financial scheme after the other.